One of the most important parts of setting up a monthly budget is separating needs from wants. Before assigning dollar amounts to any categories, it’s important to know which parts of your monthly expenditures are an absolute need, and which items would be nice to include, but are not a necessity. Many people find this particularly challenging, and many even give up on budgeting when they can’t move past this step.
Fortunately, it doesn’t have to be this way. Below, we’ve outlined how to tell the difference between wants and needs, as well as how to separate these two categories on a monthly budget plan.
Defining needs and wants
Aneedis something that is necessary to live and function.
Awantis something that can improve your quality of life.
Using these criteria, a need includes food, clothing, shelter and medical care, while wants include everything else. However, as you’ll find when creating a budget, these terms are more fluid than they appear to be at first glance. While working through your lists, you may find that some items can fit into both categories, making the process confusing.
A good trick for dividing wants from needs is to let some time pass before fulfilling your desire for the item, either theoretically or practically. The desire to obtain a need only grows stronger as time passes, while the desire to fulfill a want will weaken with passing time.
Listing your needs and wants
Now that we’ve defined each of these budget categories, you can begin listing your own needs and wants.
Start with your needs, including the basics, like food, rent or mortgage, as well as other fixed expenditures that are necessary for you to live and function. Those things may include transportation costs, health insurance coverage and any clothing or tools you need for work.
It’s important to note that needs will vary from one person to another, and even for one person at different stages of life. For example, a family with two working parents who live in a community where there is no reliable public transportation may require two vehicles. Conversely, a family living in a city with several dependable transportation systems may list a second car as a want. Similarly, a four-bedroom home may be a need for a family while they’re raising several young children, but turn into a want later when the kids go off to college.
If you get stuck on a particular item and don’t know where to place it, hold it up to the following questions:
- Do I really need this item to live and function?
- Is it possible to fill this need in a less expensive way?
- How would my life be different if this item were not a part of it? When you’ve completed your list of needs, you can list all remaining expenses in your category of wants.
Reviewing and tweaking your lists
After completing this exercise, review your list of needs to see if anything can be removed. Will you still need these items a few years from now, or even a few months from now? Can any of your needs be swapped for a cheaper option? For example, you may need clothing, but do you need eight pairs of designer jeans?
Do the same for your list of wants. Which of them are only there because of pressure to keep up with others or look good? Which of your wants were more important to you in the past than they are today? Which are status symbols? Pare down your list until you’re only left with the wants that truly add value to your life.
Now that you know how to tell the difference between needs and wants, creating a monthly budget is simple. Assign dollar amounts to your fixed and non-fixed needs, set aside money for savings and use the rest to pay for your wants.
Going forward, you’ll likely also have an easier time keeping your impulse buys under control. Before purchasing an item, ask yourself if it’s a need or a want. If the item is a want, consider its importance and other wants you’ve recently bought before going ahead with the purchase.
Separating wants and needs can be one of the most challenging parts of creating a monthly budget. Follow the steps outlined above to learn how to make the distinction between these two spending categories with ease.
FAQs
A need is something that is necessary to live and function. A want is something that can improve your quality of life. Using these criteria, a need includes food, clothing, shelter and medical care, while wants include everything else.
What is the difference between financial wants and needs? ›
Needs include food, housing, healthcare, and transportation—in other words, anything you really can't do without and maintain your health and security. Wants include items like entertainment, travel, designer clothing, and so on. If you can trim it from your budget, it's probably a want vs. a need.
What are examples of needs and wants? ›
Food, water, clothing, and shelter are all needs. If a human body does not have those things, the body cannot function and will die. Wants are things that a person would like to have but are not needed for survival. A want may include a toy, expensive shoes, or the most recent electronics.
How can a need also be a want? ›
Some need can also be a want. This occurs in situation when both of them (want and need) are necessary for survival and when both of them are desired by a consumer. For example, food is need, but pizza is a want. For consumer, pizza can be both, want and need.
How to figure out your wants and needs? ›
11 questions to understand what you want in life
- What makes you happy? ...
- What are your needs? ...
- What are your personal values? ...
- What gives you purpose? ...
- What activities put you in a flow state? ...
- What would you do if there were no limits? ...
- Who do you admire or get jealous of? ...
- How do you envision the patterns of your life?
Answer: Needs: food, water, shelter, sleep, clothing, medicine. Wants: fancy cars, expensive clothes, big houses, luxurious vacations.
Is a car payment a need or want? ›
A monthly auto loan payment typically falls into the “needs” category. If you're buying a car, it's most likely essential for getting to a job or taking the kids to school.
What is the difference between needs and wants in banking? ›
When creating a budget, it's critical to think of needs vs wants. Needs are things that are necessary for survival — think food and shelter. Wants are things you decide to buy, but don't actually need — think subscription services and new clothes.
Is a phone bill a want or need? ›
You'll want to place insurance and a basic phone plan under needs, but a subscription to a streaming service or a premium cable package will more than likely fall under wants. The next step is to tally up what you're spending in each category and see how the totals compare to your monthly take-home income.
What is a scenario for needs vs wants? ›
Some examples of needs are food, shelter, water, clothes, and medicine. A want is something that you and your family spends money on, and enjoys, but which you do not need. Some examples of wants are cable television, cell phones, toys and books.
Whether you're saving for emergencies, paying off debt, or building retirement savings, all financial goals can be considered needs. Achieving your Money Milestone is essential to staying financially fit and takes precedence over your wants throughout your journey to Financial Freedom.
How do we decide what we want versus what we need? ›
As humans, we decide what we want versus what we need based on our desires and necessities. Wants are things we desire to have but do not necessarily need, while needs are the things that are necessary for survival.
What is more powerful want or need? ›
Need and want are often used in the same context of people desiring things that they don't have. The common distinction made between the words want and need is how urgent or essential the desired thing (or person) is. The word need implies that something is essential, while the word want implies that it is not.
Why is it important to know the difference between wants and needs? ›
It's important to recognise the difference between needs and wants because our resources are limited. We can't have everything we want, so we need to prioritise our needs and make sure they are being met before indulging in our wants.
Can you tell a need from a want? ›
Our needs are the things we must have to sustain us day to day: food, shelter, clothing, personal care items, and in most cases safe, reliable transportation. Just about everything else can be classified as a want – entertainment, electronics, leisure travel … the list of things we want is potentially endless.
How do you differentiate need and desire? ›
To summarise, needs are those things that are essential for our survival and well-being; wants enhance the quality of life but are not essential; and desires are things we crave but may not be able to afford.
What is the 50 30 20 rule? ›
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals. Let's take a closer look at each category.
What are the differences between wants needs and values? ›
Or it can mean what you value, not in a material sense, but characteristics like loyalty, praise, or freedom. Values change slowly, if at all. Wants and needs often have underlying values, and those values are at the very center of your choices and actions. They are ethical, moral and spiritual.
